Theme #2: Stance on immigration policies
Curbs on foreign labour inflow to stay. In our view, the current tight immigration policies will remain in place in 2014. We do not think the recent riot in Little India will significantly change the landscape because foreign workers remain critical to Singapore’s economic growth. As illustrated in Figure 13, the Republic has become increasingly reliant on foreign labour to meet its growth targets.
Influx of foreign workers has slowed in recent years. As shown in Figure 14, the growth in the number of foreign workers (excluding foreign domestic helpers) has slowed to 5.9% in Jun 2013, its slowest in four years. The slowdown was led by cutbacks in the number of foreign workers under Employment Pass (Figure 15). At end-Jun 2013, as many as 172,100 employment passes were issued, accounting for 15.9% of the total foreign workforce (excluding foreign domestic helpers).
What are the implications? We expect the job market to stay tight with downward bias for resident unemployment rate. As shown in Figure 16, resident unemployment rate (seasonally adjusted) has declined to its lowest just right before the global financial crisis struck. Figure 17 suggests the current very tight labour market will persist as demand outstrips supply. All this points to labour costs staying elevated, which bodes ill for labour-intensive sectors such as transportation, manufacturing, construction, hotels and restaurants. Within our coverage universe, the following names are more vulnerable:
Coincidentally, we have a SELL call on both counters.
Rising cost pressures to also hurt SMEs and banks by extension. Unlike the large-cap companies, small and medium-sized enterprises (SMEs) lack product and funding pricing power put it at a disadvantage to significant cost pressures. This has negative implications for the banks sector, given that SMEs receive most of their funding sources from the banks. In our view, any potential fallout would be mitigated by the fact that lending to the SME sector has been modest, as shown in the recent 2½ years (Figure 18). From end-2011 to mid-2013, SME loans posted a modest CAGR of 4.0%. At end-Jun 2013, they accounted for only 12.8% of system loans. But we note one downside risk – the percentage of unsecured SME loans has increased in the past three years (Figure 19).
Bottomline: The key messages are:
Labour cost will continue to stay high because of manpower constraints and this is expected to exert upward pressure on costs in the labour-intensive sectors. Within our coverage universe, SMRT and Sheng Siong are more at risk than the rest.
We expect SME loan quality to remain sound in anticipation of a stronger economy. Thus, any fallout would have a minimal impact on the banks sector.
Publish date: 06/01/14